It is well-known that societies have an economic problem because they have a scarcity problem. Too many needs and desires to be met out of finite resources. As I have written in previous posts, different societies or social organizations have different degrees of scarcity and hence they face, correspondingly, a more or less severe economic problem.
The market system solves the economic problem through market transactions at the going prices. And yet, scarcity always remains the elephant in the room. By that I mean markets allocate scarce resources to people given their preferences and ability to pay but they do not ensure that everybody gets what one needs. Thus, scarcity at the personal level can persist and when it relates to basic human needs like, say, food, this type of scarcity becomes more than a market problem.
Scarcity of this type can extend beyond food to include the need for health care, child care, education, parental leave, retirement income, etc. Modern societies have to grapple with these scarcities and decide which needs should not fall victims of scarcity. Societal decisions about tackling the problem of scarcity reflect a society’s values and priorities (or biases) with respect to social and economic fairness.
Market orthodoxy accepts that personally-experienced scarcity is the individual’s problem and the individual’s responsibility to address it. But this view turns the unfettered functioning of the market system into a goal to which social concerns must be subordinated. Even in America, social values and concerns have given rise to social programs, like Social Security, Medicare, Medicaid, food stamps, child support, etc. The market view also ignores that individual scarcity downgrades society’s capacity to produce better economic outcomes. Limiting education to only those who can afford it constrains economic growth.
These thoughts go to the heart of the debate around the $3.5 trillion budget of the Biden Administration that has stirred so much controversy. More than the size of the budget proposal, it is the transformative implications of the programs funded by the budget that lie in the middle of the debate. These programs include subsidies for child care, free pre-K schooling, sick and parental leave, free community college education and subsidies to lower health care costs.
We can look at this budget proposal and see another example of big government. Or we can see it as a way to solve the scarcity problem in order to promote social fairness, economic opportunities and human development. If we agree that scarcity of goods with social value should not be determined by one’s personal means, then the role of government becomes apparent. Governments earn their legitimacy from their ability to solve or mitigate problems. The scarcity problem is one of the central problems of any society, thus, within the purview of government responsibility. I believe this is the right point of departure rather than the outright rejection of government’s role.
Those who disagree with a more active role of government in addressing scarcity at the individual or household level make several charges.
The supply side that matters is that of producers. Conservatives prefer to boost the production of goods and services through lower taxes on firms and capital suppliers (i.e., individuals with invested money) and less regulation. Thus, they rarely voice objections to using government fiscal resources to fund these policies despite evidence that they hardly help the broad masses to alleviate their scarcity problem. The reality is that both entrepreneurial and human capital are essential for economic growth. Therefore, programs that improve the quality and productivity of human capital as well as its supply should be supported and not derisively be called welfare.
Government programs make people lazy. There is no credible evidence of that. Instead, studies show that the importance of incentives is over-estimated. Conservatives often point to the lower number of work hours of European countries as evidence that government services breed idleness. A society can choose its preferred trade-off between leisure and income by favoring one over the other. Different societies can be equally happy with different trade-offs. Turning the argument around, one can charge that scarcity (i.e., inability to afford) of highly-valued goods (like health and education) is an economy’s way to keep people oversupplying labor and keep wages down for the benefit of the few.
Government programs waste the hard-earned money of the people. Not necessarily. The agencies that run Social Security and Medicare have strong records of efficiency. And private firms can waste resources as well. How many of them go bankrupt every year? If we are willing to glorify the principle of creative destruction in the private sector, shouldn’t we cut governments some slack?
Government programs misallocate resources. This means that if a good is offered at a price below its value people will overconsume it whether they need it or not. In some cases, this is true. But lower taxes and breaks to private businesses can also lead them to overproduce something and thus burn valuable resources. Misallocation can happen on both the producers’ and the consumers’ side.
Fairness and efficiency are always high in these types of debates. Only people blindsided by ideology that is not informed by evidence can conclude that left alone an economic system – any economic system – functions perfectly and fairly so that access to valuable goods and services is denied only to the most irresponsible individuals. When markets are incapable to produce fair or valuable outcomes, we need to employ the powers of government to do so.
Efficiency requires that in a world of finite resources neither the state nor the private sector can be allowed to indulge in wastefulness. But the unexamined belief that waste lies only on the government side and not also on the private side leaves a society unable to serve its citizens.
In a world where these issues are not exactly black and white, we have to ask which point of departure is most likely to produce the best results: The one that says “If you can afford it you can have it” or the one that says “If you needed and it has social value we ‘ll try to offer it.”
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